Layer 2 and Sidechains

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What is a layer 2 blockchain?

A layer 2 blockchain (L2) needs a layer 1 (L1) blockchain to exist. A layer 2 blockchain is a separate chain that links to a layer 1 chain and leverages the security of the main net. Layer 2 chains are built on top of L1 networks to provide a specific function like scalability for the L1 chain.

A layer 2 blockchain acts as a second layer on top of its base main net, thus the name. It is, hence, dependent on a layer 1 blockchain to operate. On the other hand, a layer one chain does not require an L2 blockchain to function.

Overall, an L2 chain is built to boost the functionality of its supporting blockchain and functions without affecting the operations of its underlying protocol.

How do layer 2 chains support the main net?

The main net or the basic blockchain network like Ethereum is essentially a layer 1 blockchain network that carries out transactions and handles the shared ledger of all transactions. But, the layer 1 blockchain network can become congested and slow if a high volume of transactions is processed.

Layer 2 chains are designed to diminish this congestion by facilitating transactions to be processed off-chain or outside the main network. These transactions are bundled up and eventually settled on the main net. As most of the transactions are processed on the layer 2 chain, the workload of the underlying blockchain is significantly reduced, resulting in faster transaction processing and improved network scalability and performance.

What is a side chain?

Suppose you run a decentralized exchange and want to back it up with the main blockchain network, but you find it a hassle to pay for each small transaction, create new orders, and perform smart contract functions. Besides, you want to create an infrastructure that is tailored to a specific use case. In that case, you can build your project on a side chain.

A side chain is a separate blockchain linked to the main parent blockchain enabling the transfer of digital assets and data between the two chains. Isn’t that the same as a layer 2 blockchain? No, they are different at their core. Let us see how.

A side chain serves as a mini main net. To be precise, it is a main net created with lesser functionalities. However, the key difference between a layer 2 solution and a side chain lies in their dependencies on the main network. While a layer two chain needs an underlying protocol, a side chain runs alone and can work independently. Since the sidechain is separate from the main chain, it has its own protocols and sets of rules, enabling it to be customized for particular use cases.

A side chain can have a coin backing up nodes, a public block explorer, and a way for new users to launch nodes to communicate with the main chain. Similar to a layer 1 blockchain, it is open to the public and aims to be transparent.

How does a side chain work?

A side chain works similarly to the main network, with its own consensus protocol, rules & regulations and network nodes. The consensus mechanism used by the side chain may not necessarily be identical to the parent chain. The network nodes of the side chain are often run by individuals or organizations willing to participate in the side chain and assist in securing it.

A side chain is built and connected to the parent blockchain via a two-way peg, leveraging which users can transfer assets back and forth between the parent and side chain, as per need. While transferring assets from the parent to the side chain, assets get locked on the parent chain, and an equivalent amount of assets are issued on the side chain. This process is reversed when assets are shifted back to the parent chain.

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